PM End of Week Market Commentary - 1/2/2015

On Friday gold rose +6.60 to 1189.80 on moderate volume, and silver rose +0.19 to 15.78 on moderately light volume. Both silver and gold were hit several times during London trading with gold making a new cycle low at 1167 and change - it looked like the shorts were eager to see if they could move prices lower. However once the NY market opened, buyers appeared and prices were pushed rapidly back into the green.

Whenever I see this sort of "failed move lower" I see it as bullish, much like failed rallies are bearish. A drop below a previous low that is immediately bought, completely wiping out the losses, usually has a bullish effect.

Mining shares were really encouraged by the move in gold. GDX opened lower because of the London-period gold sell-off, and as gold rallied in NY, GDX did too, eventually pushing through its 50 MA and closing at the highs for the day. GDX was up +3.05% on moderate volume, while GDXJ rose +4.30% also on moderate volume. This is only the second time GDX has closed above its 50 MA since late August - to me, this is a hopeful sign. With the end of tax loss selling season, it appears that the mining shares are now attracting buyers once again. They are at historically low valuations with respect to the price of gold.

For the week, gold was down -6.30 [-0.53%], silver dropped -0.30 [-1.87%], GDX up +3.84%, and GDXJ up +6.44%. Mining shares are dramatically outperforming metal, something I always interpret as bullish.

The USD

Once again the USD climbed higher, up +1.12 [+1.24%] on the week, with most of the gains (+0.81) happening on Friday. The fact that gold did well on a day with such a strong dollar move tells me that gold rallied in all the other currencies on Friday.

So if your salary and savings are in USD, rejoice! If you have USD debt - that's less fun. A rising currency makes debt more difficult to repay, especially if your income doesn't happen to be in USD. US companies with a large overseas earnings component will be impacted by this, as will foreign borrowers of USD.

On the other side of the hill, the Euro dropped -2.01 [-1.64%] this week, closing barely above 1.20 at 1.2002. Normally I'd suggest that 1,20 was "round number support" for the oversold euro, and I'd expect there might be a bounce here - but these currency moves have been consistently strong in recent months. Money is slowly but steadily fleeing the Euro. And this week, the Pound dropped too, falling -2.31 [-1.48%].

Greek snap elections will be held on 25 January 2015. That has the potential to be a very gold-positive event, and/or a Euro-negative event. It will be interesting to see the intensity of the propaganda campaign waged by Brussels in advance of this election.

Miners

The miners have started to recover during this week; most of the gains came on Friday, the first trading day of the new year. What's more, miners have managed to close above that pesky 50 day MA, which should bring out the buyers.

The ratios are also improving, which is a great sign. GDX:$GOLD ratio broke through its own 50 MA this week; as you can see in the chart below, the ratio has been a good indication of directionality in PM. When miners outperform gold, that's bullish. There are occasional head fakes - dealing with them is why it is called "trading" rather than "collecting your winnings every day." At least for us little people anyway.

Could this move be a headfake? It could. My guess is its the real deal, mostly because I believe the lows in December were caused by tax loss selling, but you never know.

US Equities/SPX

The US equity market was mostly flat on Friday, dropping -0.70 to 2058.20 and printing a doji on the day. On the week, SPX was down -30.57 [-1.46%]. VIX rose this week +3.29 to 17.79. So far, the January Effect doesn't look all that compelling this year.

Here's the thing: a whole bunch of money flooded into the US on Friday, with the buck up 0.90%, and yet SPX was flat on the day. That seems bearish to me. I also think the "shoe will drop" in shale, and that will impact some of the macroeconomic numbers that tend to drive equity prices: industrial production, nonfarm payrolls, and perhaps even business loan credit growth.

Gold in Other Currencies

Gold dropped when viewed in Yuan, Rupee, and Yen terms, while it rose in Euro and especially Rubles. Gold did particular well vs the Ruble, up a huge $200 on the week. The Ruble had rebounded last week on Russian Central Bank intervention, but this week it lost those gains - and that's reflected in the large move higher in Gold.RUB.

Perhaps the pink line - Gold.XDR - gives us the real ratio of gold to paper money, since the XDR is a basket of currencies: it was virtually unchanged on the week. Unfortunately I can't buy SDRs and hide them under my mattress for any upcoming currency issues, so that means I'm stuck with gold.

Rates & Commodities

Bonds (TLT) rallied strongly on the week, gaining +2.34% and scoring a new weekly closing high for this cycle. Like the dollar, it has just been up, up and away for the long bond.

JNK on the other hand fell -0.22% on the week. Unlike the long bond, JNK looks like it is forming a distinct pattern of lower highs and lower lows on the weekly chart. This marks a downtrend. Why do we care about JNK? When JNK is trending lower, its the first sign of weakness in the credit markets, which often precedes a general move lower in the economy. JNK are our coal-mine canaries, or so the theory goes.

No good news for commodities again this week - CRB dropped a big -2.66%. That was due to agriculture and energy components, both of which were down -4.2% on the week. The rising dollar helps drive commodity prices lower, since world-wide most commodites are priced in dollars.

Oil continued lower, WTIC dropping -2.33 [-4.23%] to 52.81, making new lows on the week, invalidating the high volume hammer candle made two weeks ago. However, the dramatic sell-off I expected on the break below 53 didn't happen. Instead, oil has just been ticking slowly lower. This suggests to me there is a lot more buy-side support here in the low 50s versus when oil was trading in the mid-60s, even though the sellers are still outnumbering the buyers.

It feels to me like the oil market is news driven right now, and that it will require something fundamental to change the psychology of the traders. Two options come to mind: severe geopolitical instability in the middle east, or a significant slowdown in production in the US shale regions.

The next "near realtime" real-number update to US shale production is the Directors Cut Report provided by the North Dakota Dept of Mineral Resources. It should be out in a week or so. We'll see if completions, permits, and drilling have continued to slow down, and we'll also get monthly production numbers for November, a month when prices averaged $60/bbl. If oil can find its footing, that will likely help silver.

ETF premiums mostly rose, with the non-delivery ETFs gaining the most ground.

Futures Positioning

The COT report was through Dec 26th, when gold was trading at 1195.30 and silver 16.11.

In gold, Managed Money bailed out of -4.5k longs and increased shorts by +5.0k, increasing their net short exposure. Producers bailed out of -11k shorts and -2.4k longs; there was a big drop during the coverage period, and Producers tend to cover short during the dips, much as they like to increase shorts during rallies.

In silver, Managed Money reduced holdings slightly, while Producers increased shorts by +1.8k and dropped long exposure by -4k. Producers increasing shorts and dropping longs isn't a great sign with silver prices this low. Perhaps they are worried about deflation.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term DOWN, medium term DOWN, long term DOWN.

Silver: short term DOWN, medium term DOWN, long term DOWN

The metals are both still in a downtrend.

Summary

Gold and silver had a choppy four-day week, down one day, then up the next. Gold poked its head above its 50 MA for a day, but then dropped back down again, while silver couldn't even manage that much. Miners, on the other hand, did manage to break out above their 50 MA, rising nicely on a week when both gold and silver retreated. It is my belief that miners tend to lead gold - both higher and lower, so I take this behavior as bullish.

All the moving averages are falling, which is bearish. The gold/silver ratio rose +1.01 to 75.38 on the week, close to a new cycle high, looking quite bearish. GDX:$GOLD broke higher this week, moving strongly up through its 50 MA, which is bullish. GDXJ:GDX improved, but is not looking quite as bullish as GDX:$GOLD. SIL:$SILVER is looking the best of all, breaking through its 50 MA a day earlier than GDX. The lagging moving averages still point lower, Gold/Silver ratio is moving higher, while we are seeing more signs of hope this week in the miner-metal ratios, which tend to lead.

Physical demand is positive.

For the rest of the markets, most of the trends remain in place. Dollar continues higher, as does the US long bond. Commodities are continuing to fall: oil, and now agriculture too. Equities are looking a bit weak; the strong dollar did not help an equity market drop this week, they money went into bonds instead. That smacks a bit of "risk off" to me.

For PM, the strong miner performance is a hopeful sign. Perhaps the rising miners can pull gold above its 50 MA in the coming week. We need to see that as a first step in a PM rally; gold needs a close above 1200 to get the party started, and a close above 1240 to convince the shorts that their easy money time is over. While we are expressing our fond wishes for the future, it would be helpful too if commodity prices stopped dropping, and if the dollar stopped rising.

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I agree with their overall analysis, and I respect their philosophy and approach. On the weekly chart, gold must first close above the previous high at 1240 before it will be seen by the disciplined traders as having "stopped going down." A gold MA crossing of the 50 that actually sticks will be a first step.

Until that happens, the trend remains down, as demonstrated easily by the three moving averages I use.

However I look at more than just the raw gold & silver charts. For me, miners provide directional clues and indications of a possible transition, and right now they are looking more positive than they have in months. If that strength continues, we may yet see that close above 1240...